CCR could be a ‘gold standard’ for credit risk

Earlier this year, financial services stakeholders were invited to submit their responses to the exposure draft of the National Consumer Credit Protection Amendment (Mandatory Comprehensive Credit Reporting) Regulations 2018.

The legislation will amend the Credit Act to mandate that lenders share comprehensive credit information with credit-reporting bodies. A voluntary regime of a similar kind has been in place since March 2014; however, low levels of participation have led the government to mandate it.

The CCR regime will require the four largest banks to supply 50 per cent of their consumer credit information within 90 days of 1 July 2018 to all credit-reporting bodies they had an existing agreement with on 2 November 2017.

Speaking to Mortgage Business, David Shellenberger, senior director, scoring and advanced analytics at FICO, said that Australia’s adoption of comprehensive credit reporting (CCR) would simplify compliance to responsible lending obligations.

“With the addition of the new data elements that would be brought to bear with CCR, we see that there’s an opportunity to create a common lexicon for credit risk, or a ‘gold standard’ that can be used across industries and across the life cycle,” Mr Shellenberger said.

“We’ve certainly seen that to be a huge benefit, especially here in the US, where credit scores are key throughout the mortgage industry particularly.

“It’s very useful to have a common metric that can be used by all parties, including brokers and other originators, as well as lenders and investors.”

Mr Shellenberger also responded to concerns that the CCR regime would entrench the financial position of consumers that have faced financial difficulty in the past.

The FICO director said that the sharing of data through the CCR regime, which is set to be facilitated by open banking, would deliver positive benefits to all areas of the market.  

“Any time that you have more data, it tends to benefit consumers in general,” the senior director said.

“The notion is that lenders would price for uncertainty — the greater the uncertainty around the consumer, generally the higher prices overall. 

“If you can identify and reduce that uncertainty, it tends to benefit the majority of consumers.”

He continued: “The greater insight that a lender might have in terms of understanding balances, understanding the utilisation they may have on other credit obligations, can be very useful in helping identify the consumers that may have experienced financial difficulty in the past and may have been able to regain their footing. 

“I think the notion that if you have a black mark, that it’s going to stay with you forever, is misplaced.”

Moreover, Mr Shellenberger added that CCR, driven by open banking, would help drive competition in the banking sector.  

“I would expect that there would be greater competition with more data,” the senior director said.

“If I’m a lender, and I have you as my customer, and you have all your banking relationships with me, the other potential competitors really don’t have the same view of you as I do.

“Asymmetrical information really is not conducive to a competitive marketplace, so by making data open to all players, it creates a much more competitive environment, and I suspect as things go forward, obviously with CCR as a first step and with open banking taking place in the middle of 2019, I think that we can expect a greater competitive environment.”

However, Mr Shellenberger concluded that in order to facilitate the smooth implementation of the CCR regime through open banking, stakeholders must come to terms with the rapidly changing technological environment.

The FICO director concluded that despite the potential hurdles that regulators may have to overcome in the implementation process, the benefits of CCR would be “realised rapidly”.

“I would say by the middle of next year, you’ll start seeing greater opportunity in advancement, in leveraging that data,” the senior director said.

“I think that there is probably a lot of uncertainty, with respect to how this data will impact me as a consumer, and I think that’s where we would point back to experiences that we’ve had in the US, about leveraging broad-based scores for syndicated models.”

He concluded: “By being able to have a gold standard, whereby consumers can understand their credit standing, based on a score that is calculated from the underlying credit file data, that can help consumers better under standard what their credit file means to them from a risk standpoint and how that translates into better loan terms and, ultimately, a better rate.” 

[Related: Banks’ IT systems might not be fit for CCR: APRA]